Labour markets: Too cheap to replace

JASON DOUGLAS grabs a chart from a presentation by Ben Broadbent (soon to be a deputy governor at the Bank of England), which shows wage earners in Britain capturing a much larger share of national income than those in America.

Mr Douglas writes:Why might this divergence have occurred?…One possible explanation, according to economists, is that companies in the U.S. pruned their workforces more severely when the downturn hit than British firms did. British bosses, faced with higher layoff costs and wary of losing skilled staff as they did in previous recessions, decided to keep as many workers on as they could and take the hit instead to their bottom line. U.S. unemployment peaked at 10%; in the U.K. it never rose above 8.4%. The result was that workers’ share of the pie increased and the chunk going to profits declined.Well, now wait a moment. The chart clearly shows that Britain’s wage share tracked America’s closely right up until the recent recession. So one should ask what was uniquely different about the British and American experiences in this recent period. Labour-market rules? Appreciation for skilled labour? Neither seem likely candidates. But what about inflation? Since the beginning of the recession, annual British inflation has averaged 3.1%, to 1.8% in America. That’s a pretty big difference, which has generated a very large corresponding divergence in …

Link to article: www.economist.com/blogs/freeexchange/2014/03/labour-markets-0?fsrc=rss

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